Compatibility Choice by Multi-market Firms

There are many markets where customers can combine multiple products to greater effect, or where customers can communicate with each other. In these cases compatibility of products by different vendors has a large effect on the product market. Which choice firms make about the compatibility of their products tends to depend on the wider context in which they make this choice. Some vendors may be multi-product or multi-market forms. The implications that (in)compatibility in one market may have for their other markets will affect their compatibility choice. A corollary of this argument is that a change in the multi-product or multi-market scope of a firm will create a strategic shift in its preference for compatibility. Both mergers and alliances may have the effect of changing the relevant scope of products or product markets that a firm serves. The event of such a merger or alliance will tend to change its compatibility preference. This paper develops a model to explain the possible strategy shift of a merger or alliance due to feedback between the various markets that a firm serves. It explores the compatibility choices for digital videodisks that consumer electronics, computer, and media companies experienced in the mid-1990s.